Just nine months into his second tenure as the governor of the Bank of Mauritius, the country's central bank, Ramesh Basant Roi has already faced a number of stern challenges. Among them has been the volatility of the rupee, which in the opening months of 2015 was Africa’s third worst-performing currency, according to Bloomberg. Continued weakness in the eurozone and further depreciation of the euro, which has impacted on exports to key trade partners, has hit Mauritius and the national currency particularly hard. Yet, interventions by the central bank into the Indian Ocean island’s foreign exchange market have since arrested the rupee’s decline.
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“After joining the Bank of Mauritius in January 2015, in my second stint as governor, I have encouraged closer interactions between the central bank and players in the domestic foreign exchange market," says Mr Basant Roi. "The objective has been to better assess demand and supply conditions, and address the distortions that have been undermining market efficiency. We have also been, after several years, conducting regular sterilised interventions on the foreign exchange market.”
In addition, upgrades to the Bank of Mauritius’ technical capabilities have allowed for enhanced oversight of foreign exchange transactions in the country. The introduction of Reuters Deal Tracker, a monitor and processor of foreign exchange trades, has given the central bank the ability to access real-time data on domestic foreign exchange transactions executed by banks.
“These initiatives triggered a market correction of the rupee exchange rate. They also helped the Bank of Mauritius to send clearer signals to the market and ward off unwarranted exchange rate volatility. I must say that the rupee has since stabilised, and is broadly in line with economic fundamentals,” says Mr Basant Roi.
Exchange rate volatility
Efforts by the central bank to address exchange rate volatility have gone hand in hand with a number of new and longer term projects to improve the country’s financial regulatory landscape by both the central bank and the government. Indeed, amendments to the Bank of Mauritius Act will offer wider powers to the governor, including the ability to regulate and supervise intermediate financial holding companies that have at least one subsidiary that is a financial institution licensed by the Bank of Mauritius.
“I have launched several initiatives since the beginning of 2015, designed to reinforce the regulatory framework and cater for fast-evolving standards in the financial industry. Recently, the banking legislation was an amendment to vest the Bank of Mauritius with wider powers to safeguard financial stability,” says Mr Basant Roi.
“The establishment of a crisis resolution framework and a deposit insurance scheme is well under way. Further measures are in the pipeline to protect the interests of depositors, preserve the reputation of Mauritius as a safe and transparent jurisdiction, and achieve financial stability.”
Meanwhile, Mr Basant Roi remains confident about the stability and growth prospects of the country’s banking sector. Indeed, gross non-performing loans for the sector have only marginally increased in recent years, despite a number of broader economic challenges, sitting at 4.4% as of March 2015.
“Banks operating in Mauritius are generally well capitalised and financially sound. They all maintain a capital adequacy ratio above the minimum requirement of 10% – with an average of 17.1% in March 2015, of which the Tier 1 capital ratio was 15.2%. The high Tier 1 capital ratio bestows the banking sector with a solid capital buffer to deal with stressed situations,” says Mr Basant Roi.
Remaining challenges
Nevertheless, challenges in the banking sector remain, including the high leverage ratios of some of the country’s larger domestic corporates. Close attention is also being paid to possible exchange rate risk emerging from local lenders’ exposure to various frontier emerging markets, including south Asia and sub-Saharan Africa.
“To address credit and foreign-exchange risk, the Bank of Mauritius encourages banks to strengthen their internal credit rating procedures, while strictly abiding by existing guidelines and limits on foreign exchange exposures. Banks are also encouraged to conduct regular stress tests and have formal, well-developed contingency funding plans to manage their credit, foreign exchange and liquidity risks,” says Mr Basant Roi.
